On March 28, 2023, the U.S. Securities and Exchange Commission (SEC) announced that it had settled its ongoing litigation with Vale S.A., a Brazilian mining company whose American depository shares and notes are registered with the SEC and publicly traded on the New York Stock Exchange.1 The SEC alleged that Vale knew its Brumadinho dam, which collapsed in 2019 and killed 270 people, was unsafe before its collapse and made false disclosures about the safety of the dam to deceive authorities and investors.2 Notably, the allegedly false statements occurred in the company’s disclosures related to environmental, social, and governance (ESG) matters contained in sustainability reports, periodic filings, and other disclosures. Under the settlement, which remains subject to court approval, Vale agreed to pay $55.9 million to settle the charges.
This was the first case brought by the SEC’s Climate and ESG Task Force. The case highlights the SEC’s increasing focus on ESG-related disclosures and demonstrates the SEC’s willingness to bring enforcement actions under the existing disclosure framework where it views ESG-related disclosures to be false or misleading.
The SEC’s Enforcement Action
According to the SEC’s April 2022 complaint, Vale committed securities fraud by intentionally concealing risks that its Brumadinho dam might collapse.3 Specifically, beginning in 2016, Vale manipulated multiple dam safety audits, obtained fraudulent stability certificates, and fraudulently disclosed that the Brumadinho dam was safe in multiple public disclosures. The complaint further alleged that Vale knew the Brumadinho dam did not meet internationally recognized standards for dam safety but nonetheless used sustainability reports, presentations, ESG webinars, and its SEC filings to fraudulently convince investors otherwise.
Linking this case to its ESG initiative, the complaint alleged that the dam collapse caused "immeasurable environmental, social, and economic devastation." The collapse released nearly 12 million cubic tons of mining waste into the Paraopeba River, resulted in the deaths of 270 people, and had downstream damaging effects on the local community and economy.
Additionally, the complaint alleged that Vale’s disclosures caused "significant harm" to investors. Prior to the collapse, Vale assured investors that its dams had been audited, that the audits had not identified any structural issues, and that Vale had received independent stability declarations. The complaint alleged that Vale’s concealment of the true condition of the dam, as well as related dams, caused Vale’s annual sustainability reports and other public disclosures to be materially false and misleading. Following the dam collapse, Vale’s market capitalization declined by over $4 billion, its American depositary shares lost more than 25% of their value, and Vale’s corporate credit rating was downgraded to junk status.
In settling the action nearly a year after it was filed, Vale agreed to pay a $25 million civil penalty and $30.9 million in disgorgement and prejudgment interest, in addition to general injunctive relief. We note that the $30.9 million in disgorgement and prejudgment interest is unusually large for a disclosure case, but the methodology for the disgorgement calculation is unclear. In the SEC’s accompanying press release, SEC Associate Director Mark Cave stated that the settlement would "levy a significant financial penalty against Vale and demonstrate that public companies can and should be held accountable for material misrepresentations in their ESG-related disclosures, just as they would for any other material misrepresentations."
The Vale action was the first brought by the SEC’s 22-person Climate and ESG Task Force, which continues to bring additional enforcement actions for ESG-related disclosure issues.4 The SEC’s current focus on ESG-related disclosures likely will lead to more ESG-related enforcement actions.
The Vale action illustrates the types of ESG-related disclosure cases the SEC may bring under the existing disclosure framework. The SEC’s actions demonstrate a view that ESG-related disclosures are material and that misrepresentations or omissions related to such disclosures broadly will be closely scrutinized and considered actionable. Public companies may garner even more scrutiny when they are affected by adverse events that have any connection to their ESG-related disclosures. In addition, the Vale action demonstrates that the SEC’s scrutiny is likely to extend beyond periodic filings and into other ESG-related disclosures, such as those in sustainability reports or other climate-related analyses. This is equally true for foreign issuers that access U.S. capital markets for equity or debt investments.
Public companies should continually and carefully review their ESG-related disclosures for accuracy and completeness and should maintain disclosure controls and procedures that are designed to ensure the accuracy of their ESG-related disclosures. In addition, companies should maintain documentation to support ESG and climate-related representations.
1 SEC Press Release, Brazilian Mining Company to Pay $55.9 Million to Settle Charges Related to Misleading Disclosures Prior to Deadly Dam Collapse (Mar. 28, 2023), available at https://www.sec.gov/news/press-release/2023-63.
2 For additional information, please see the previously published Sidley Alert on the Vale enforcement action, available at https://www.sidley.com/en/insights/newsupdates/2022/05/sec-brings-first-esg-related-action-since-creating-climate-and-esg-task-force.
3 See SEC v. Vale S.A., No. 1:22-cv-02405 (E.D.N.Y. Apr. 28, 2022), available here.
4 See examples of enforcement actions relating to ESG issues or statements spotlighted on the SEC’s webpage for its Climate and ESG Task Force, available here: https://www.sec.gov/securities-topic/enforcement-task-force-focused-climate-esg-issues.
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